As Premier Li Keqiang has recently stressed the importance of ridding the Chinese economy of “zombie” firms, the task of slowing the tide of wasteful credit to unproductive companies is becoming far more urgent for Chinese authorities. A detailed look at often unexamined provincial PBOC credit data highlights both encouraging and worrisome trends on this front, and like a Rorschach test, observers may see what they choose to see within the data regarding China’s medium-term economic trajectory.
There are clearly signs of internal rebalancing of the economy, as credit growth has slowed sharply within provinces suffering from industries with excess capacity over the past two years. In addition, there is evidence of softening credit demand, indicative of the importance of market forces in guiding banks’ credit decisions, and strong divergences in credit trends across provinces.
Yet at the same time, credit data from several provinces shows policy-led resistance to both rebalancing and slower investment via continued rollovers of policy lending, while overall credit trends appear least sustainable within some of the northeastern and interior provinces most associated with China’s sunset industries. Credit growth has continued to outpace nominal GDP growth in all but a handful of Chinese provinces in 2014 and so far in 2015, continuing a broader and unsustainable macro trend.
